Canada's 200 largest companies are more aware than ever of the business risks and opportunities associated with climate change, and they are considerably more responsive to investor requests for information about their carbon risk strategies than they were only a year ago.

-At the same time, however, the information being disclosed is still deficient in certain areas, particularly in terms of financial usefulness. These are the main findings of the Carbon Disclosure Project 2007: Canada 200 Report, released on October 10 by The Conference Board of Canada.

"Investors have clearly influenced the responsiveness of these companies," said David Greenall, principal research associate at the Conference Board and Canadian Carbon Disclosure Project (CDP) co-ordinator. "Compared to last year, Canada's largest companies are more aware of the business risks and opportunities presented by climate change, more likely to act to manage their greenhouse gas emissions, and more responsive to investor requests for information." Despite the improved responsiveness, he continued, "important financial data continues to be largely absent. A mere 14% of companies provided financially relevant information, such as the cost of reducing emissions and meeting mandatory emissions reductions targets."

The Carbon Disclosure Project 2007 (CDP5) is the world's largest collaboration of institutional investors. It represents 315 global investors--including 30 based in Canada--that have an unprecedented $41 trillion in assets under management.

In February, the CDP requested disclosure of relevant information about climate change and carbon risk management strategies from 2,400 companies around the world, including the 200 most valuable companies by market capitalization listed on the Toronto Stock Exchange. (The companion CDP5 global report looks at the FT500, i.e. the 500 companies ranked by the Financial Times newspaper as the world's largest by market capitalization.)

Of the 200 companies that received the CDP5 request, 45% responded, a substantial increase from the 28% that answered last year's CDP4 request. More than three-quarters of the top 50 companies responded this year, a response rate that places Canada near the top of all countries surveyed.

The findings of the Canada 200 Report, prepared by the Conference Board, show that 88% of respondents believe climate change presents business risks, while 86% see opportunities. In comparison with the previous year's survey, the gap between corporate risk awareness and use of GHG management systems has narrowed, which suggests that more companies are taking formal steps to manage their exposure.

Overall, larger companies and those with higher levels of greenhouse gas (GHG) emissions provided more complete responses than did small and mid-capitalization companies and low-GHG-emitting companies.

Although more companies reported, the amount of financially-relevant information provided remained limited in the 2007 report, as with the CDP4. Important financial data such as abatement costs, contingent emissions liabilities and revenue projections continue to be largely absent from company responses, says the report.

This year's report has also introduced the first-ever Climate Disclosure Leadership Index (CDLI), an honour roll of Canadian companies that are taking the initiative in addressing the challenges posed by climate change. Sixteen companies have been identified as "Climate Disclosure Leaders" on the basis of the superior quality of their responses to the CDP5 information request. These leading companies have shown distinction in their reporting of GHG emissions and assessment of climate change strategies and their transparency in regards to the effectiveness of programs put in place to reduce overall emissions.

At the Toronto presentation of the report, CDP chief executive Paul Dickinson announced a major new supply chain partnership between the CDP and Wal-Mart, through which the CDP questionnaire will be distributed to some 68,000 suppliers. The retailer's involvement with the CDP reflects its overall commitment to sustainability and will have a substantial impact on the quantity and range of data that the new partnership will yield. Wal-Mart, noted Dickinson, is a bigger trading partner with China than all of Canada.

Dickinson also said the CDP will begin offering a new, fee-based core database service. Building on the information gathered regarding companies' GHG emissions and emissions management, reduction and cost implications, their analyses of the commercial risks and opportunities from climate change, and their strategies for responding to the risks and opportunities presented by climate change, the CDP will classify and organize the data into more precise, focused topic areas that can, for a fee, be downloaded by clients. This initiative will mark the first time the CDP has charged for its service.

The Toronto CDP5 event included a review of the global CDP5 report findings by Dr Matthew Kiernan, CEO of Innovest Strategic Value Advisors, the firm that wrote the report. He said climate change is driving a worldwide industrial restructuring toward a low-carbon future--a trend that has already begun. This year's questionnaire, he said, drew a 77% response rate, the highest to date, up from 71% last year. He described the responses overall as "more robust," reflecting better carbon accounting.

The results also point to a narrowing of the gap between climate change awareness and action, with 95% of companies that consider climate change to present a commercial risk reporting that they have implemented a GHG reduction program, complete with specific targets and timelines.

As well, 76% of the responding companies reported implementing a GHG emissions reduction initiative, up from 48% in last year's CDP4 report. While 79% of respondents considered climate change to present commercial risks, 82% also agreed that climate change also presents strategic opportunities for both existing and new products and services. This growing recognition will drive possible change as the move to a low-carbon industrial structure proceeds, Dr Kiernan noted.

At the same time, the survey reveals wide variations in carbon risks and opportunities both within and among sectors. The main risks are associated with companies' exposure to regulatory regimes, while the opportunities generally involve the development of new products and services leading to new revenue streams. The majority of responses also raised the continuing issue of regulatory uncertainty, which makes it difficult to calculate the costs of compliance with GHG regulatory regimes. The theme of regulatory uncertainty as a barrier to greater action to reducing GHG emissions appears with continued, regrettable regularity in both the global and Canada 200 reports.

Although companies are closing the awareness/action gap, the global CDP5 report says [institutional] investors have not yet matched this improved awareness and information with action. Providing climate change information relevant to investors has been a key goal of the CDP since its inception. Dr Kiernan said the next frontier in this regard will involve a growing number of investors seeking climate change information and then basing their investment decisions on that information.

Disclosure dodgers

While a record number of FT500 companies responded to this year's CDP questionnaire, a substantial number continue to disregard shareholder requests for carbon disclosure, adds the report. Twelve per cent failed to respond to the CDP at all, while another 8% declined to participate. The Canada 200 report also expresses concern about this, in view of the acknowledged strategic business relevance of climate change. (A full list on non-respondents is included in the Canada 200 report.)

A legal perspective on the economic implications of disclosing financial risks associated with climate change, by experts from the McCarthy TÈtrault law firm, appears in the September edition of EcoWeek's sister publication, EHSCompliance (www.ehscompliance.ca).

Commentators at the Toronto report presentation also called for the establishment of a regulatory framework based on absolute emission reductions rather than curbs in emissions intensity (i.e. emissions per unit of production). This, said Jeff Rubin of CIBC World Markets, will set the stage for an effective emissions trading system. If governments set firm targets for GHG reductions, the market will set a price (which he estimated at between $30 and $40 per tonne for real economic traction). As the cost of emitting rises, the cost of abatement will become more reasonable and will encourage the development and use of green technology, he added.

Nearly half of U.S. states have passed cap-and-trade legislation which will result in absolute GHG reductions, Rubin noted. Factoring in the typical two- to three-year delay between U.S. and Canadian legislative and policy trends, he observed, "Ottawa's carbon policy of tomorrow is being passed in U.S. state legislatures today."

Ultimately, he concluded, the "decarbonization" of the economy is not about substituting one form of energy for another. The real task is to reduce energy demand, a transition that will bring about a radical change in the economy and in economic behaviour.

The Carbon Disclosure Project is an independent not-for-profit organization, established in 2000 as a special project of Rockefeller Philanthropy Advisors in New York to facilitate dialogue between companies and investors. The CDP is dedicated to gathering high-quality information that can be used by its participants to develop a rational response to climate change.